Investor · Sioux Falls, SD · Member since 2016 · 102 posts · 113 votes
Does anyone have any advice on how to turn their primary residence into a rental when upgrading to a new home? I want to keep my first house as a rental but transfer the title to an LLC. I understand that will activate my mortgage's due on sale clause and I would have to refinance that loan? Will I still be able to get a 30 year mortgage? If I had to do a commercial loan and move down to 20 years, cash flow would take a large hit. My mortgage banker suggested a trust. Will that still protect my assets? Anyone have experience with this? Thanks!
Whether or not you should use an LLC is really dependent on your situation and goals. If you are just starting out or do not have a lot of assets to speak of, an LLC may be a bit premature unless it is part of a strategy other than asset protection. It is a personal choice, though.
The reality of the due on sale clause is that it is highly unlikely that the bank will exercise their right to accelerate the loan. But they may, so you need to be prepared for that. They may just ask you to change the title back into your name, and/or you may have the right to do that. I don't know about the second part, that is lawyer stuff and probably state specific.
If you have less than 4 properties financed then you should have no problem getting a 30yr fixed loan at only slightly higher rates if your DTI will support it if you had to refinance, but that would have to be in your name. Otherwise, there are private lenders that will lend to an LLC at 30yr fixed but at much higher rates (6%-8%) and higher costs for the loan. In that case, or in the case of a commercial loan, the property itself will have to support the mortgage payment in terms of the DSCR.
I would talk to an asset protection attorney in regards to a trust, not a mortgage banker. A trust does offer some protection apparently, but it is highly dependent and assumes the trust is set up and run properly. My understanding is that your standard revocable living trust does not offer nearly as much protection as an LLC, but that may not necessarily be the case and is again, very state and personal situation specific.
You may be able to get some good ideas here, but ultimately you are going to have to shell out some dollars to real subject matter experts that are familiar with your situation and objectives to get the best answer.
Whether or not you should use an LLC is really dependent on your situation and goals. If you are just starting out or do not have a lot of assets to speak of, an LLC may be a bit premature unless it is part of a strategy other than asset protection. It is a personal choice, though.
The reality of the due on sale clause is that it is highly unlikely that the bank will exercise their right to accelerate the loan. But they may, so you need to be prepared for that. They may just ask you to change the title back into your name, and/or you may have the right to do that. I don't know about the second part, that is lawyer stuff and probably state specific.
If you have less than 4 properties financed then you should have no problem getting a 30yr fixed loan at only slightly higher rates if your DTI will support it if you had to refinance, but that would have to be in your name. Otherwise, there are private lenders that will lend to an LLC at 30yr fixed but at much higher rates (6%-8%) and higher costs for the loan. In that case, or in the case of a commercial loan, the property itself will have to support the mortgage payment in terms of the DSCR.
I would talk to an asset protection attorney in regards to a trust, not a mortgage banker. A trust does offer some protection apparently, but it is highly dependent and assumes the trust is set up and run properly. My understanding is that your standard revocable living trust does not offer nearly as much protection as an LLC, but that may not necessarily be the case and is again, very state and personal situation specific.
You may be able to get some good ideas here, but ultimately you are going to have to shell out some dollars to real subject matter experts that are familiar with your situation and objectives to get the best answer.
I can not answer your direct questions but I do know that single family primary residences usually make for very poor investment income properties. In your case if the difference between 30 and 20 year mortgage is an issue then you probably have a negative cash flow property already.
Post your numbers and experienced investors can give you an analysis of your property.
Investor · Sioux Falls, SD · Member since 2016 · 102 posts · 113 votes
10y
@Thomas S. Thanks. Attorney has advised LLC. Although I'm just getting started in real estate, I have a higher net worth that needs protection. Just curious how others handle their single family homes if they are in a similar situation.
That will be a negative cash flowing property in the long run. You are not accounting for vacancy, maintenance, or CapEx, all of which will put in into the red fairly quickly.
I have transferred properties into LLCs with no issues in ten years. That includes former primary residences. There are properties that I did not transfer because I deemed the risk was to high, i.e. either I believe the lender would be less tolerant or the loans against the property were too much for me to bail out if I got stuck. It is a judgment call. Like I said, it is highly unlikely that it will be a problem, but it does happen.
There are ways to transfer the property so that it is not blatantly obvious what you did, but no way to do it without violating the clause. Not if you want the protection that an LLC or similar entity offers. That's my opinion at least.
Investor · Sioux Falls, SD · Member since 2016 · 102 posts · 113 votes
10y
@Edward B. Interesting. I figured maintenance and CapEx would be minimal since the home is only 6 years old and I've been the only owner knowing how well it's been maintained. Maybe that shows my inexperience. I appreciate your insight.
Professional · Lexington, MA · Member since 2016 · 136 posts · 43 votes
10y
@Chris Pohlson: (I am not an attorney): Under the Garn-St Germain's Act of 1982, one can transfer the property into an inter vivos trust in which the borrower is an remains the beneficiary.... which does not trigger the "due-on-sale" clause.
Generally this is done in coordinate with Estate Planning, where the trusts and other entities are appropriately created.
Work with a qualified estate planning attorney who understands these nuances.
Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
10y
@Chris Pohlson, they might be less, but not what I would consider minimal. I assure you that the tenants will be harder on the property than you have been. In terms of CapEx, you have to start saving now or the expenses will not be pleasant when they hit in 3,4,5,10 years. So if you are not setting aside a little bit every month for CapEx, it will come out of pocket down the line.
@Rajeev Kotyan, that is absolutely my understanding as well. And I am also not an attorney. But as I mentioned above, that type of trust affords you very little protection compared to an LLC.
Makawao, HI · Member since 2016 · 19 posts · 5 votes
10y
i'm a newbie and did what you are doing...i turned my primary residence into a rental and bought another property to live in...the discussion of asset protection came into play...i talked to an asset protection lawyer and he immediately suggests an LLC ($$$). what people don't realize that if not setup and managed properly, hence using a lawyer (again...$$$), will be almost useless in a law suit. LLCs with a trust gets more complicated and expensive at the same time.
talked to another lawyer, and she told me to merely get a ~$2m umbrella policy...~$20-$30 /mo. cheaper/easier and will cover most if not all damages IF you get sued. not sure if this will work for you or not...but a suggestion as well.
Professional · Lexington, MA · Member since 2016 · 136 posts · 43 votes
10y
@Edward B.: (I am not an attorney): Inter vivos means living (not a trust definition)... Trust structures, do and don't, level of protection is all based on how the trust is designed, and good attorney's (and worth their money), can get all the protection you may want and need. Garn-St Germain Act does not apply to LLC (atleast as far as I understand -- attorney's please chime in here).
Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
10y
@Rajeev Kotyan, I have established several trusts and am familiar with the terminology. I agree with you that the Act does not apply to LLCs, although I have heard people make the argument that it could. Not a fight I would want to fight. My point was that you cannot get the same level of protection in a trust that the Act applies to that you can in an LLC. You would have to begin looking at irrevocable trusts or transferring the beneficial interest of the trust, which would violate the due on sale clause, among other issues. It starts getting very complicated and very complicated usually equates to very expensive when lawyers are involved. You may need that level of protection or you may not. You absolutely need to consult with an attorney that is not only familiar with these aspects of law, but also understands your situation and what you are trying to achieve.